insight magazine

What's in Is Out in Illinois

Just how intolerable is Illinois? A look at what’s behind the Land of Lincoln’s outmigration problem. By NATALIE ROONEY | Winter 2018

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Outmigration. It’s the technical term for what the mainstream media refers to as an exodus. Although, when it comes right down to it, exodus, defined as a mass departure of people, is pretty fitting for what’s happening in Illinois — people, and their businesses, are fleeing the state.

According to the Illinois Policy Institute, Illinois has lost nearly 643,000 residents on net since 2010. From July 2016 to July 2017, the state saw a net loss of nearly 115,000 people to other states on net. That’s one person taking flight every 4.6 minutes.

“People say net migration in Illinois has been negative for the last 100 years and that this is no big deal. But over the last four years, the population has started declining. Fewer people are coming here, and more are leaving,” says Orphe Divounguy, Ph.D., chief economist at the Illinois Policy Institute. “Net migration just got worse.”

Census data reveals the stark truth: So many individuals have left Illinois over the past four years that it has fallen out of its spot as the fifth most populous state, slipping to sixth behind Pennsylvania. Only West Virginia has seen more consecutive years (five) of population decline. The kicker: None of Illinois’ neighboring states have experienced population declines since 2011.

Lindsey Piegza, chief economist at Stifel, Nicolaus & Company, lists Illinois’ cost of living, state and local government fiscal woes, and the continued shifting of the tax burden to taxpayers as the main drivers of outmigration. “Families may not be able to leave right now because they have kids in school, but there’s an incentive to get out as soon as they can,” she says.

It’s no different for businesses. “Why not move across state lines and enjoy a more favorable tax environment?” Piegza asks. “Why tether yourself to a seemingly destructive path?”

While the criticism is harsh considering several states are facing rapidly rising deficits, a problem in Illinois is the lack of an honest recognition of the problems.

“We’re not hearing solutions, and there’s a willingness to make a problem bigger before addressing it,” Piegza stresses.

THE ELEPHANT IN THE ROOM


In almost any conversation about Illinois’ economic health, you’re likely to hear what one growing problem is: pension liability.

“We have the worst pension costs and funding. Costs are rising, and our politicians have resorted to tax increases. If economic growth slows, you don’t get more revenue and pensions take up more of the budget, you can’t have the discretionary funding to pay for education, police and fire investments — any of the things Illinoisans care about,” Divounguy says.

Piegza hits the pension point hard as well. “We have this outstanding pension liability we know we can’t support. It’s an antiquated program. Why aren’t we addressing it?” she asks. “There are no honest conversations about stopping the bleeding, let alone moving the patient into surgery.”

“Pensions are the biggest issue facing Illinois, but it didn’t even come up on the campaign trail this year,” Divounguy points out. “Lawmakers can’t wait any longer to address rising healthcare and pension costs with meaningful reforms. For Illinoisans to see a future in this state, pension reform must become a public and legislative priority.”

THE SHIFTING TAX BURDEN


Ranked number 36 in the Tax Foundation’s 2019 State Business Tax Climate Index, “honest conversations” about how to turn the tax tide also need to happen. “The concern is that the state’s tax structure will go from bad to worse if a proposal to change from a single rate structure to a graduated rate structure is enacted,” says Katherine Loughead, policy analyst at the Tax Foundation. “Currently, the flat rate structure is the one redeeming quality in an otherwise uncompetitive tax code.”

A permanent fear of a pending tax increase has Illinois businesses weighing their options. “When a state can’t balance a budget because pensions take up a larger share of state spending, then investors have a constant fear of tax increases…. Well, that is sufficient to deter investment in the state,” Divounguy says.

He points to the fact that approximately a third of individuals leaving Illinois are moving to Wisconsin and Indiana. “The weather is the same, so that’s not the reason. Wisconsin is outpacing Illinois in terms of employment growth and new businesses. People are going where there are better paying jobs and better opportunities.”

But it’s not just individuals taking flight; business starts and net business are down in Illinois, while data from the Bureau of Labor Statistics shows net new businesses are rising in other states seven times faster than in Illinois.

Since 2010, as the state has been slowly recovering from the recession, Illinoisans have been hit with a 46 percent increase in corporate income tax and a 32 percent increase in personal income tax, a state record.

“‘Dire’ is the word a lot of people are using,” Loughead says, adding that when Illinois raised its income tax rate from 3 percent to 5 percent in 2011, it raised an additional $30 billion, but the backlog of bills remained higher than before the increase took effect. “Generally speaking, when Illinois raises taxes, it’s not productive. Tax increases alone aren’t going to solve a state’s fiscal problems.” The tax increases Loughead refers to partially expired in 2015, but the legislature overrode Gov. Bruce Rauner’s veto and the rate increased again in 2017 to its current rate of 4.95 percent.

FEELING THE STING


Real world stories from Illinois CPAs and their clients support the outmigration statistics. Brian Bradbury, CPA, a partner in Kemper CPA Group’s Robinson, Ill. office, says his clients — mostly individuals, small businesses, S corps, and partnerships — are feeling the sting.

The city of Robinson sits just five miles from the Indiana border. While many of his clients who farm or work in oil extraction, construction, or trucking can’t just pick up and move, they have had serious discussions about pursuing work in Indiana rather than Illinois.

“The tax burden is a big concern for them,” Bradbury says. “They’ve asked why they can’t just operate out of Indiana because, in their minds, the business environment is better and tax rates and workers’ compensation rates are lower.”

“Illinois isn’t as competitive as neighboring states when you look at the manufacturing and construction industries,” Divounguy confirms. “Prevailing wage rates in Illinois mandate that whoever is working on a government project pays a wage rate above market. Those regulations make it difficult to do business here. So, again, Illinois isn’t seeing the kind of business creation that neighboring states and the rest of the country are seeing.”

Bradbury has also observed a local manufacturer shift production to other facilities and a large refinery struggle to attract and retain individuals at its Illinois facility. “Property taxes are one reason. People choose to live in Indiana and commute because they can find comparable housing and pay less in taxes.” It puts his clients in a tough spot. “This is a small community. These people have been here for generations, and it’s where they want to be, but it’s challenging,” he says.

Northbrook, Ill.-based CPA Dana B. Davidson has also watched business clients leave Illinois. “She picked up and pulled all of her equipment out of Illinois,” Davidson says of a client who operates an answering service for doctors. “The business environment was her push to go.”

But Davidson says it’s not all bad in Illinois. One positive change for businesses came in 2017 when Senate Bill 867 reduced the cost of starting a limited liability company in Illinois from $500 to $39. Prior to the change, Illinois had the highest LLC start-up fee in the country.

Still, Chuck Taylor, CPA, principal of Clifton Larson Allen’s Oak Brook, Ill. office, isn’t shy about saying his clients, closely held businesses of all sizes, are “negative about Illinois right now” and “would love to move.”

The challenge for most business owners remains the same though; it’s hard to uproot an established business. But when the time comes for business owners to sell, they exit Illinois quickly. “High net worth individuals don’t stick around,” Taylor says. “They stay, raise their kids, and then sell, transition, and move out of state.”

The most negative sentiments, Taylor says, are toward Illinois’ property tax system. “When looking at physical locations, new facilities are driven away from Illinois because of property taxes and the way the system works. Other states are more aggressive.”

For example, in the healthcare industry, Indiana caps insurance differently for physicians who practice across state lines. In construction, non-union work is easier to get in other states. And while Taylor says he hasn’t crunched the numbers, that nagging distrust about what’s going to happen with pensions keeps rearing its head. “The general thought is that it’s going to get worse, not better,” he says.

WHAT CAN BE DONE?


It would be nice if the state would tap into the accounting and finance talent it has here to get to a better place. But the hard truth is there’s no easy solution to clearing off years of massive and costly debt.

“We have to stop the programs we know are unsustainable, ineffective, and extremely expensive,” Piegza says. “We need updated policies that reflect today’s economy and labor market.” She points out that pension benefits for government workers used to be necessary because they were paid so much less than private sector workers, but that’s no longer the case.

Any solution will be painful she predicts — a combination of tax increases, spending cuts, and an increase in payment receipts. How much of each? “It will depend on the appetite of taxpayers,” Piegza says. “The higher and faster you raise taxes, the faster you’ll lose your tax base and exacerbate the divide between expenditures and receipts. It’s a delicate balance.”

Loughead cautions that a change from a flat rate individual income tax or another increase “could make a lot of people throw in the towel on Illinois.” “We need pension reform and a spending cap so our budget process doesn’t leave us with tax hikes every other year,” Divounguy says.

“We need well-informed organizations and individuals to go to their lawmakers and advocate for policy changes. The more people reach out to lawmakers and push them to do the right thing, the more hope we have that we’ll be in good shape for the future.”